EU Turmoil Makes Russia the Sanctioned Bond Market Traders Love

Finance Minister Anton Siluanov has said Russia's Eurobond may come in the spring
Finance Minister Anton Siluanov has said Russia's Eurobond may come in the spring

For money managers wary of the elections looming in Europe, the worst relations with the West since the Cold War and sanctions on Russia’s biggest companies are no deterrent. The nation’s debt is cheaper to insure against default than Italy’s. A victory for populists in the Netherlands on March 15 could give anti-EU candidates a boost when voting is held in France, Germany and possibly Italy this year.

Russian bonds have the allure of a haven after recovering oil prices helped pull the economy from its deepest recession in two decades and lift the ruble from a record low. With yields 10 times higher than the euro-area average, investors are better compensated for risk in Russia than in France, where most polls show National Front candidate Marine Le Pen leading the first-round vote next month.

“It’s an eternal paradox that a country that’s under sanctions is considered to be low volatility and attractive to investors,” said Greg Saichin, the chief investment officer for emerging-market bonds at Allianz Global Investors in London, which has 480 billion euros ($511 billion) under management. “You have to take your hat off to the way they’ve managed the recession.”

After dropping more than 100 basis points in the past year, Russian five-year credit-default swaps trade at levels that imply the country should shake off its junk rating, according to Saichin. Moody’s Investors Service, which along with S&P Global Ratings puts the country one level below investment grade, raised its outlook to stable from negative in mid-February.

Political Passions

Russia is also benefiting from a broader shift from European to emerging-market bonds. Exchange-traded products tracking developing-nation bond indexes lured $1.3 billion in February, while those tracking European investment grade debt suffered outflows, analysts at BlackRock Inc. said in a research note last week.

“If you’re worried about Europe, then emerging markets make sense,” said John Roe, the head of multi-asset funds at Legal & General Group Plc., the U.K.’s largest manager of pension assets. With bond supply squeezed by sanctions over Ukraine, Russia has a scarcity factor that makes it a “top pick” within the developing world, he said.

Russia has done its bit to stir up political passions in Europe and the country’s state-funded media has given lavish coverage to anti-establishment parties.

French candidate Emmanuel Macron last month accused Russia of meddling in the country’s election by putting out fake news. Earlier this month, President Vladimir Putin’s United Russia party said in a statement that it signed a cooperation deal with Italy’s anti-immigration Northern League party.

Fed Looms

Sentiment toward Russian debt could sour if the U.S. Federal Reserve moves toward more hawkish monetary policy at its meeting this month.

While emerging-market investors are unfazed by the likelihood of an interest-rate increase, any hints toward a faster pace of hikes this year “could trigger a deeper correction in risk assets,” analysts at Bank of America Corp. said in a research note last week.

U.S. payrolls expanded at a faster clip than forecast in February, boosting the case for tighter monetary policy. Yields on Russian dollar sovereign bonds maturing in May 2026 jumped 15 basis points to 4.32 percent last week, the most since the period ending Nov. 18.

The relative tranquility on Russian markets may help the government issue its planned Eurobond. Finance Minister Anton Siluanov has said the bond may come in the spring, while a Bloomberg survey of 16 economists conducted last month concluded there’s a 55 percent chance that the ministry will offer debt by the end of April.

Richard Segal, a London-based credit analyst at Manulife Asset Management, which has about $343 billion under management, recommends buying any foreign offering by the government as well as the dollar bonds of companies in the metals and mining sector. “Russian Eurobonds have become a relative safe haven,” he said in an interview during a recent visit to Moscow.

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